Building a business is risky, even more so if there is more than one company founder. People are always evolving, circumstances always changing. Our interests and focus can change from one year to the next, along with our friendships and relationships.
As such, two friends going into business together may seem like a great idea. Sometimes it works out, sometimes it doesn’t. A legal partnership is a smart move for any business owner. Regardless of whether you’re going into business with a friend of twenty years or someone you met yesterday.
The merits of law is a tricky topic to understand. Online legal blogs, such as lawmanaging, can help simplify the ins and out of legal issues.
If you’re considering entering a business arrangement, find out why a legal document offers more security than a simple handshake.
What Does a Partnership Agreement Typically Cover?
In simpler times, a handshake WAS considered a legal agreement. However, times are complicated, and a legit legal document holds more weight these days than a friendly gesture.
A partnership not only offers legal protection, it makes running a business smoother. Less time will be spent on petty arguments because the partnership will spell out the rules, leaving owners more time to do actual business.
Partnership agreements widely vary depending on the business, but most typically include the following elements:
- Who manages the day-to-day decisions
- How profits are divided amongst the partners
- How much new capital each partner is required to provide
- Responsibilities of each partner
- Process of bringing in new partners
- Process of expelling a partner or voluntarily leaving partnership
Forbes reports that business partners splitting up is the third most common cause of businesses failing. A legal partnership can the remaining partners stay in business. The agreement should be enacted once the business idea formulates into an actual plan.
4 Benefits of a Partnership Agreement
Some business owners may feel a partnership agreement is a jinx, like some think prenuptial agreements predict the end of a marriage. In some views, it takes the romanticism out of the business.
In reality, prenups and partnerships are only meant to ensure that you leave the union with what you entered it with. 4 reasons why you need a watertight business partnership include:
- Expectations of a business partnership versus reality. Someone you find trustworthy today may not be so trustworthy tomorrow. Partnership agreements are based on the fact that people change, ideals change.
- Preserve friendship with no hard feelings. If you go into business with a friend, a partnership can help preserve your friendship if the business goes bad. Every decision will be outlined in the agreement, leaving no room for feuds or friendship-ending disagreements.
- Protects majority and minority owners. If your business allows non-partners to invest in the business, a partnership agreement will protect them financially.
- Provides a process for removing an underperforming partner. Many business partnerships detail the process for removing a partner or removing oneself from the ownership. Because, again, people change, and so do their interests.
Business Partnerships Are Protection, Not Harbingers of Failure
When two or more people agree to go into business together, they are often optimistic about it. A business partnership doesn’t have to damper that spirit. If anything, it signifies the mutual respect and admiration of the partnership.